By Myra P. Saefong and William Watts
Oil futures ended higher Wednesday for a second straight session, as traders penciled in expectations for aggressive pandemic aid spending by the administration of President Joe Biden.
“Markets are filled with enthusiasm for a new policy era, and oil markets are no exception,” said Bjørnar Tonhaugen, head of oil markets at Rystad Energy, in daily commentary. “The Biden administration is not only seen as the beginning of more political stability in the U.S., but also as the catalyst for a generous relief package that will create more economic activity and more demand for oil as a result.”
“More spending means more money changing hands, more transport and more products,” the Rystad analyst said.
On Tuesday, Janet Yellen , the former Federal Reserve chair and Biden’s nominee to be U.S. Treasury secretary, told the Senate Finance Committee that the government should “act big” when it comes to fiscal spending aimed at boosting the economy as it attempts to recover from the COVID-19 pandemic.
West Texas Intermediate crude for February delivery (NYM:CL.1) rose 26 cents, or 0.5%, to settle at $53.24 a barrel on the New York Mercantile Exchange. March WTI , which became the front-month contract at the day’s settlement, climbed by 33 cents, or 0.6%, to finish at $53.31 a barrel.
March Brent crude , the global benchmark, rose 18 cents, or 0.3%, at $56.08 a barrel on ICE Futures Europe.
“The calculation is simple: increased fiscal support means more growth and higher U.S. oil demand,” said Eugen Weinberg, commodity analyst at Commerzbank, in a note.
Biden has proposed a $1.9 trillion spending package , which faces a tough battle in a 50-50 Senate where Democrats will have control by virtue of Vice President Kamala Harris’s tiebreaker vote.
Most of the gains for oil can be attributed to the “expectation of stimulus money,” said James Williams, energy economist at WTRG Economics. However, “in a longer term view, there are factors which could go either way.”
“A ban on fracking on federal lands would have a negative impact on U.S. production which is positive for oil price,” Williams told MarketWatch. While on the downside for oil prices, Biden is “more likely to be softer on Iran and a lifting of sanctions is possible. That puts more oil on the market and downward pressure on price.”
Meanwhile, the oil market is likely to remain in a supply deficit over the first quarter and the rest of the year thanks to a surge in demand in the second half of 2020 as economies began to recover from the coronavirus pandemic along with disciplined compliance with OPEC+ production curbs , Weinberg said.
“It is true that the higher oil prices in recent months have led to increased exploration again,” Weinberg said. “However, production itself will only respond after some delay. And for another thing, many shale oil producers will have to take a more defensive approach after the bitter lessons learned in recent years, establishing a solid financial strategy for themselves and repaying their debts rather than pursuing growth at any price.”
Weekly data on U.S. petroleum supplies will be released a day later than usual because of Monday’s Martin Luther King, Jr. holiday.
The American Petroleum Institute will release its report late Wednesday, with official figures from the Energy Information Administration to follow Thursday morning.
On average, analysts expect the EIA to report a decline of 2.5 million barrels in crude supplies for the week ended Jan. 15, according to a survey from S&P Global Platts. They also forecast supply increases of 2.7 million barrels for gasoline and 600,000 barrels for distillates.
On Nymex Wednesday, February gasoline added 0.4% to $1.5439 a gallon and February heating oil tacked on 0.1% to $1.6004 a gallon.
February natural gas settled at $2.539 per million British thermal units, down 0.3%, after a 7% drop Tuesday.
“Although short-term weather forecasts call for below-normal temperatures for the northeast and western U.S., those expectations are being offset by warmer conditions in the south,” said Christin Redmond, commodity analyst at Schneider Electric, in a Wednesday note.